Press release

5 Jun 2023 London, GB

Latest PMI adds to inflationary concerns – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to the EY ITEM Club

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Related topics Growth
  • May's S&P Global/CIPS survey signalled a modest slowdown in business activity. However, it also pointed to a rise in cost pressures faced by services businesses. This will add to the Monetary Policy Committee's (MPC) concerns about inflation persistence and raises the likelihood of a further rate rise in June's meeting.
  • The latest survey was consistent with positive GDP growth in Q2. However, the EY ITEM Club expects the economy to have performed less strongly than the Purchasing Managers’ Indices (PMIs) imply, owing to the drag from the extra bank holiday in May and the impact of ongoing industrial action on public sector output.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “After the S&P Global/CIPS survey signalled a strong increase in activity in April, May's survey reported a slower but still-healthy pace of growth. The composite PMI fell to 54.0 from 54.9 the previous month, with falls in both the services and manufacturing PMIs. However, unlike the latter, a decline in the services PMI from 55.9 to 55.2 left it still comfortably in expansionary territory.

“Less robust growth in the services sector was not accompanied by a slowdown in cost pressures. In fact, May's survey showed the strongest rise in input costs in three months, driven in part by rising wages. Prices charged inflation did ease in May, but this slowdown could prove short-lived if higher input costs are passed onto consumers in the future. Following evidence of stickiness in the official inflation numbers, signs of stronger cost pressures will add to the MPC's concerns over inflation persistence and further tips the balance towards a further 25bps rate rise later this month.

“Meanwhile, the latest composite PMI is consistent, based on past form, with positive GDP growth in Q2. The economy in May was probably weaker than the PMIs imply, since the business surveys may have struggled to pick up the impact of the extra bank holiday for the coronation. And they won't have captured the direct effects of industrial action on public sector activity. But it’s now looking more likely that GDP managed to expand slightly in Q2.”